The release of the latest Intergenerational Report shows in detail why the Federal Government's policies are in desperate need of an overhaul.
Despite the natural increase of the population and steady migration contributing to a total Australian population of 36 million by 2050, it is forecast that the proportion of Australians aged 65 and over is expected to almost double to 23 per cent by the middle of the century.
This demographic ageing implies that the numbers of working-age people to fiscally support the aged will decline significantly.
Today there are five people aged between 15 and 64 to each person aged 65 and over. By the middle of this century, there will be just 2.7 people of working age for each older Australian, the report says.
Already the messages from the Government about the appropriate policy responses to address the economic and fiscal challenges of population ageing have been mixed.
Prime Minister Kevin Rudd has talked promisingly about the need to boost productivity and engage in micro-economic reform. The Intergenerational Report says Australia's economy could be 15 per cent larger by 2049-50 if productivity growth rose to 2 per cent a year.
But the potency of the prime-ministerial rhetoric is dulled when it becomes apparent that the Government's productivity strategy rests on spending other people's money on unproductive infrastructure, such as the national broadband network, and more corporate welfare including R&D grants.
Compounding the issue is the gap between words and deeds on the economic policy front that has already emerged, constraining our capacity to deal with long-term challenges.
For example, our ability to enhance productivity at the workplace level has been stymied by back-to-the-future industrial relations changes that have reduced flexibility and reasserted union power. Major elements of federal stimulus spending, including $900 cash splashes, subsidies for insulation batts, duplicated school halls and ornamental local government projects, were informed by the need to spend taxpayers' money quickly rather than finding the best-value proposition.
Meanwhile, the Rudd experiment in co-operative federalism including regulation reform is failing under the weight of COAG's reform inertia. The Government has also trotted out its advisers to test the electoral waters regarding other ways to respond to the economics of ageing challenge.
Treasury Secretary Ken Henry recently said the tax system needed to be prepared for the probability that revenue needs would grow strongly in the longer term to finance the government-provided goods and services demanded by the community.
This attempt at softening up the electorate for extra tax hits ignores the fact that the very same electorate is likely to express its displeasure against rising taxes, including through the ballot box.
The community uproar against the Emissions Trading Scheme, with the cascading revenue effect of cap and trade licences potentially raising the prices of every conceivable good and service in the country, is a case in point.
Henry's plea for additional money also ignores the global reality of labour and capital movements constraining the revenue appetites of governments. Push taxes up too much, and people (including those of working age) and industries will either move away or not relocate to Australia in the first place.
More fundamentally, the proposition to increase taxes into the future will harm Australia's quest to improve its productivity performance. This is because taxation distorts the economic activities of businesses and individuals, reducing the potential to reallocate scarce resources to the highest-valued uses.
Meanwhile, the Government has been fiscally preying on future generations -- that dwindling share of workers in our demographic mix of tomorrow -- by backsliding towards a fiscal regime of Budget deficits and public debt.
Young Australians yet to enter the world of work will have to shoulder the burden of repaying the principal and interest on government debt for at least another decade, if not longer.
These fiscal outcomes in response to the global financial crisis have put Australia further behind in its attempts to address demographic ageing. The latest mid-year economic and fiscal outlook statement shows the Commonwealth expects an accrual budget deficit of $54.4 billion, or 4.3 per cent of GDP.
At the time of the second Intergenerational Report, the former Howard Government estimated the Budget would be in surplus this year to the tune of $13 billion, equivalent to 1.1 per cent of GDP.
The Treasury estimates that the fiscal gap between expenditure and revenue will approach 2.75 per cent by midcentury. This is contingent on the Rudd Government's assumption of a return to Budget surplus by 2015-16, a highly optimistic one given the Government's propensity to spend a fiscal inheritance rather than implement deep spending cuts.
The worsening long-term fiscal outlook presented by the Intergenerational Report shows why policy actions befitting economic conservatives, in the form of lower taxes, strict limits on government spending and economic deregulation, will become increasingly vital to head off the impending fiscal crunch of ageing.
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